Fin svcs update (stablecoins, crypto market structure)

Recent/upcoming developments… In addition to the strong commitment President Trump has made to facilitating a supportive regulatory environment for crypto, Congressional Republicans have begun to move quickly on legislation in this area, and have set expectations that this is their top priority for financial services policy and that a bill will be enacted into law.  They have established a House/Senate working group to facilitate close coordination.  Senate Banking Committee (SBC) Chair Scott (R-SC) is focusing initially on stablecoin legislation, while House Financial Services (HFSC) Chair Hill (R-AR) is simultaneously developing stablecoin and broader market structure legislation.  On a related note, there is some legislative activity surrounding the creation of a Bitcoin strategic reserve, though that is not as much a focus as other policy issues.  Meanwhile, the nomination process for Paul Atkins as SEC Chair is moving slowly, though given President Trump’s clear mandate to support crypto, the commission is already moving forward on various fronts such as dropping the accounting guidance that has inhibited bank custody of crypto, and settling significant litigation against crypto market participants.  Travis Hill, Acting Chair of the FDIC, has signaled that his agency will also shift direction on crypto policy and be more supportive of bank partnerships in this area, sentiment we expect to hear from Jonathan Gould, Trump’s nominee to lead the OCC.

* Sen. Hagerty (R-TN) has introduced a stablecoin bill (see this link).  Under the bill, bank issuers of more than $10b of stablecoins would be supervised by the Fed and non-bank issuers of more than $10b would be subject to OCC supervision and oversight.  Issuers under $10b of stablecoins would be regulated by the states.  The bill also requires stablecoin issuers to maintain one-to-one reserves, prohibits algorithmic stablecoins, and requires issuers to comply with AML rules.  Hagerty’s bill is cosponsored by Sens. Lummis (R-WY), Gillibrand (D-NY), and Alsobrooks (D-MD), the latter of which is notable, given that she’s a Democratic member of the SBC.

* HFSC Chair Hill and Rep. Steil (R-WI) have also introduced a stablecoin bill (see this link), which builds off of former HFSC Chair’s McHenry’s (R-NC) stablecoin legislation, introduced last Congress.  Under the Hill/Steil bill, stablecoin issuers would register either with a state or a federal bank regulator irrespective of an issuance threshold.  State issued stablecoins would register with the state.  At the federal level, non-bank stablecoin issuers would have the option of registering and being supervised by the OCC while banks would be supervised by their normal banking regulator.  HFSC Ranking Member Waters (D-CA) has criticized the Hill/Steil bill as “light on consumer protection” and introduced an alternative bill.

* HFSC Chair Hill has said that the market structure bill he’s developing will have the same basic structure as the FIT21 legislation developed by former Chair McHenry, which passed the House last year by a vote of 279-136, with the support of 71 Democrats (see this link for a summary).  He did say that the bill will have modest changes.

* President Trump has called for the creation of a strategic Bitcoin reserve, and legislation has been introduced by Sen. Lummis to do so (see this link).  White House AI Czar Davis Sacks has said an administration crypto working group plans to quickly examine the feasibility of this concept.

Our outlook… Stablecoin legislation has a 60+% probability of being enacted this year, with momentum somewhat inhibited by the degree to which it is tied to slower moving market structure legislation.  Policy development on stablecoins is very advanced, and there is a reasonably high level of bipartisan support for it.  Despite Republicans being equally committed to broader market structure legislation and a demonstration of bipartisan support for it last year, it is likely to move on a somewhat slower timeline, particularly in the Senate, and only has a 40% probability of enactment this year, though this is likely to rise next year.  Market structure legislation is more complex and the bipartisan consensus-building process surrounding it in the Senate is at an earlier stage.  Once confirmed as SEC Chair, we expect Atkins to take preliminary steps (e.g., gather public comment) to develop rules surrounding key questions such as what constitutes a digital security, what role various crypto market participants are able to play, etc., but that he will move slowly so as not to get in front of Congressional Republicans in addressing these questions.

* In order for stablecoin legislation to move forward on a bipartisan basis, we need to see progress resolving key issues such as the balance of responsibility between federal and state regulators, as well as the role played by the Fed and OCC, which states can oversee issuers, how bankruptcy of an issuer is handled, and how international issuers (e.g., Tether) are treated.

* In order for crypto market structure legislation to move forward on a bipartisan basis, we need to see of progress resolving key issues such as AML/KYC requirements, how DeFi is treated, and resolution of decentralization/control as a test for what constitutes a digital security.

Watch for these developments… We are watching for the following to determine the level of momentum for crypto legislation…

* The most important initial indicator of whether stablecoin legislation has momentum will be the level of Democratic support that begins to materialize in the SBC.  The support of seven Democrats is necessary for the bill to pass in the full Senate, and we will need to see the support of at least a couple on the SBC in order to sustain our view that legislation is marginally likely to be enacted this year.  Our expectation is that stablecoin legislation will pass in the SBC and HFSC by April/May, the full Senate and House by August, and then House/Senate negotiations to conclude and the bill to be enacted into law by December.  A slower timeline will require us to reduce our 50+% probability of enactment this year, and a faster timeline would require us to increase the probability.

* As with stablecoins, we are looking for signs of bipartisan support for market structure legislation in the SBC, as well as the Senate Agriculture Committee, the latter of which appeared to exist last year.  If market structure legislation passes in the SBC and HFSC by August, that would point to robust momentum, and require us to increase our probability of enactment above 40%.

* The level of support we see for a Bitcoin reserve on the SBC and HFSC will determine how much momentum it has.  If it is included in market structure legislation in either committee, that would signal that it has at least a 20% probability of enactment, and if not, then the probability will be lower.